One of the biggest areas of change within this year’s budget surrounded pensions. The aim was to improve choice and flexibility whilst removing unpopular elements from the past. What transpired was a genuinely big shift in policy that is due to be implemented from the 6th April 2015 following consultation. In the meantime interim measures have been actioned. Before discussing the relative merits let us run through exactly what the proposals are;

For all of the above the tax treatment remains the same as at present. Therefore, 25% of a pension pot can be taken tax free whilst the remainder is taxed at one’s highest marginal tax rate. These rules become effective as of the 27th of March 2014.

From April 6th 2015 the planned pension system will allow the following;

Currently, you can only withdraw a maximum of 25% of your pension pot as a lump sum. Any amount in excess of this is charged at 55%. Under the new proposed rules the excess will be charged at your marginal tax rate. For many, this will be 20%. The government predicts that there will be a high uptake of this option which will result in a windfall for them.

Due to the increased flexibility offered under these proposals the government is considering ways to reduce pension transfers from defined benefit (final salary) pension schemes, which are likely to be unaffected by the changes, to defined contribution (money purchase) schemes. As public sector schemes are mainly unfunded this could be very costly for the government. Even private sector final salary schemes could have a big impact on the government’s finances due to their obligation to buy government debt (gilts) to cover their guarantees. These reasons point to a high chance that it may become difficult to transfer pensions out of such schemes come 2015. This could, in particular, effect some non UK residents who may wish to transfer their pension to a qualified recognised overseas pension scheme (QROPS) or equivalent.

Although the new pension rules are undoubtedly good news, especially for those who wish more control over their savings, the government don’t make radical changes unless it is in their interest. We should therefore consider how the government benefits and, importantly, what this means for us? The following are the benefits to the government from this initiative;

Considering these points it is necessary to be fully aware that with the increased proposed choice comes higher responsibility. It is more important than ever to make correct financial decisions thereby ensuring one’s pension lasts the course. The whole premise of a pension system was to ensure that the savings pot accumulated provided income throughout retirement. The new proposed rules changes this and the fundamentals of a pension system. One should therefore take control, where possible, of their wealth and manage it accordingly. Those who do this successfully will truly benefit by tailoring how they withdraw money from their pensions to their lifestyle requirements.

Finally, for non UK based individuals, although the key benefits of QROPS remain it will be important to act quickly if they hold defined benefit pension schemes. As mentioned, the option of changing from a final salary scheme may not be open to them after April 2015. Whether this type of transfer is beneficial depends upon each individual’s requirements. As such, please contact us for further information on the best course of action available to you.

Update: New UK pension rules have been announced giving further clarity including confirmation of a reduction in death tax rates. Further consultation, however, is ongoing regarding specific rule changes for QROPS.
 
 
Information collated from numerous sources including HMRC.